Friday, October 22, 2010

My View

Random thoughts from a warped and fevered mind...

This is part two of the civics lesson that we started last week. To see part one, go here.

We hear politicians pontificate all the time about government "creating wealth". This is especially true in an election cycle and the closer we get to election day. Besides having a vastly over-inflated view of themselves as individual politicians and government as a whole, there is one little thing wrong with this assertion.

It is not true.

In fact, government does more to destroy wealth than to create wealth.

To see how, we need to first understand what wealth is. Simply put, wealth can be described as the possession of items of economic and utilitarian value that is more than necessary to survive. Wealth can amassed over time through savings, investment, earning a higher income, the production of a desired product or from the transfer of assets, such as an inheritance, to name a few ways.

Focus with me on the accumulation of wealth. If you are a business or a productively employed individual, you are producing a "desired" good or service. Say you make widgets. You have certain costs that have to be covered: the cost of your land and building; your labor costs; raw material costs; and production costs, for example. To "build wealth", your firm has to make widgets that are competitive in price and also attractive to the buying public. They have to sell them at a profit to pay for all those costs we just mentioned plus allow the company to bank some funds for uses in other areas, whether it is expansion, or paying higher salaries.

Or suppose that you are a trained professional, say a nurse. You have a service that is "desired"- hospitals are desperately seeking nursing professionals. That service that you provide has value and generates an income. There are costs associated with the income that is generated- nursing school, continuing education, uniforms, and other costs associated with the profession. The income generated by the nurse that is above those costs goes toward creating wealth.

I will stop right here and get the obvious out of the way. We all know businesses that have a desired product but have gone bankrupt. Think Government Motors, uh, General Motors. We all know individuals that have made very good salaries that have filed bankruptcy. The point of this essay is not to discuss management of wealth, but the creation of wealth in the classical sense.

In the two examples above, the business and the individual, both created a desired product or service and generated income over and above the cost of the inputs. That is the classical definition of creating wealth.

The key aspect of these examples is that the product or service is desired by the marketplace.

Now, dear readers, tell me what goods or services that the federal government produces that the market (you and me) voluntarily desires to purchase?

I'll wait.

And wait...

What's that?

Can't think of any?

That's because the government produces no goods.

The services that it provides are not voluntarily paid for by the public and not necessarily "desired". Now I know that we can all argue that there are some "services" that the government provides that we want, and I agree. I am grateful for the best military in the world to defend our shores. However, when one honestly examines the majority of services that our government "provides", one finds that they involve a transfer of wealth from producers in society to non-producers. (I am using the term "producer" and "non-producer" in a strictly economic sense without a value judgement toward any group of individuals).

Folks, transferring wealth from one sector of society does not "create wealth". It provides instead a strong disincentive to continue to produce wealth since it will be confiscated through higher taxes and transferred away.

Here is, however, what government can do regarding the creation of wealth. First, provide clearly established "rules of the game"- laws and regulations that govern commerce, trade, and all aspects of business. Secondly, consistently enforce those rules of the game. Third- and this is the most important of all, create an environment that encourages the creation of wealth.

I will say it again. Create an environment that encourages the creation of wealth. Remove the disincentives to the creation of wealth by lowering taxes and removing regulatory barriers to businesses being able to create jobs. Allow individuals to keep more of what they earn, save, or invest.

Do this, and the overall wealth of this nation will grow. Substantially.

Now ask yourself this, since the government cannot create wealth, has it created an environment where wealth can be created and retained?

C'mon. Be honest.

You know that our government- at any level- has generally fostered an system that is hostile to wealth creation. High taxes, fees, and bureaucratic red tape serve to siphon off wealth rather than create an environment to grow wealth.

So the next time a politician of either party tells you that it is important for government to create wealth, know that this is a statement that has no basis in reality.

I have given up on getting buns of steel. Now I just want buns of cinnamon.